Notes
to Condensed Consolidated Financial Statements
March
31, 2019
The accompanying condensed
consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”), formerly Ksix Media Holdings,
Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated
in Nevada on November 5, 2014; Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed on September
14, 2011; Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC (“BLVD”), a Nevada
limited liability company that was formed on January 29, 2009; DigitizeIQ, LLC (“DIQ”) an Illinois limited
liability company that was formed on July 23, 2014; Surge Cryptocurrency Mining, Inc. (“Crypto”), formerly
North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006; Surge
Logics Inc (“Logics”), an Nevada corporation that was formed on October 2, 2018; and True Wireless, Inc., an
Oklahoma corporation (formerly True Wireless, LLC) (“TW”), (collectively the “Company” or “we”).
All significant intercompany balances and transactions have been eliminated in consolidation.
Recent
Developments
As
reported on Form 8-K filed with the SEC on April 16, 2018, on April 11, 2018, the Company closed the merger transaction (the “Merger”)
that was the subject of that certain Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless,
Inc., an Oklahoma corporation (“TW”) dated as of April 11, 2018. At closing, in accordance with the Merger Agreement,
TW merged with and into TW Acquisition Corporation, a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary
of Surge Holdings, Inc. (the “Merger”), with TW being the surviving corporation. As a result of the Merger, TW became
a wholly-owned subsidiary of the Company.
As
a result of the controlling financial interest of the former members of TW, for financial statement reporting purposes, the merger
between the Company and TW has been treated as a reverse acquisition with TW deemed the accounting acquirer and the Company deemed
the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting
Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of TW (the accounting acquirer)
are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition.
The acquisition process utilizes the capital structure of the Company and the assets and liabilities of TW which are recorded
at their historical cost. The equity of the Company is the historical equity of TW retroactively restated to reflect the number
of shares issued by the Company in the transaction. See Note 4.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V. (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services for SURG. Centercom also provides call center support for various third-party clients.
The Company’s primary initiatives for Centercom are:
|
●
|
Assisting
in on-boarding SurgePays Portal into over 40,000 retail locations and subsequent ongoing white glove support
|
|
●
|
Aggressively
marketing new “Free Wireless Service” program to substantially grow customer base while enhancing customer service
|
|
●
|
Launch
SurgePays Reloadable Visa Card by end of 1
st
Quarter
|
|
●
|
Support
the Company’s IT infrastructure including database management
|
|
●
|
Upsell-related
FinTech products to our existing customer base to increase revenue
|
Business
description
The
Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e.
persons who have little or no access credit) within the population. The Company provides a suite of services which are primarily
marketed through small retail establishments which are utilized by members of its target market.
Historically,
the Company’s principal business has been digital advertising and lead generation through two of its wholly owned subsidiaries—DIQ,
which is a full-service digital advertising agency specializing in survey generation and landing page optimization specifically
designed for mass tort action lawsuits and KSIX, which is an Internet marketing company and has an advertising network designed
to create revenue streams for its affiliates and to provide advertisers with increased measurable audience. KSIX has an online
advertising network that works directly with advertisers and other networks to promote advertiser campaigns and manage offer tracking,
reporting and distribution.
Commencing
in 2018, the Company’s focus has significantly expanded to include the pursuit of the following business models:
Surge
Telecom
True
Wireless
is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all
4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 60,000 veterans and other
qualifying federal programs such as SNAP (EBT) and Medicaid.
SurgePhone
offers discounted talk, text, and 4G LTE data wireless plans at prices that average 15% – 40% lower than competitors.
(Unlimited plans start at just $10/month) Available nationwide, SurgePhone also offers strategic discounts such as the Surge Heroes
campaign that rewards teachers, first responders, active military and veterans with a free Android smartphone (surgeheroes.com).
SafeHomePhone
is a nationwide home phone alternative. This product has a modem that connects to the PCS network and allows customers to
plug in their traditional home phone without paying the local phone company or worrying about wiring. Customers can save 60% or
more and keep their same number.
The
SurgePhone Volt 5XL’s
slim, sturdy, affordable design fits comfortably in your hand and easily in your pocket. It’s
mesmerizing 5” LCD touchscreen display delivers an HD entertainment experience for your favorite videos and movies, while
dual front and back cameras allow you to capture stunning photos. Plus, with an expandable micro SD memory slot, you can add even
more storage for your best memories
SurgePays
Visa
is targeted for a Q4 2018-Q1 2019 launch. This card will perform the functions of a traditional credit card and also
a checking account for the unbanked or credit challenged. The SurgePays card will offer safety, security and convenience of using
the card anywhere that accepts Visa. Customers will be able to access their accounts from the connected app to remit money to
friends and relatives while avoiding costly fees. In addition, customers will also be able to take a picture of their paycheck
and load the cash to their cards (eliminating costly check cashing fees).
Surge
Money Order
will launch in the Midwest and southeast in Q1 2019. This is a natural add-on to our convenient store Fintech
product suite and will ensure we box out any other stand-alone product competitors. Entering the $20 Billion a year money order
business will enable unbanked customers to send secure payments.
SurgePays
Portal
is a multi-purpose software interface for convenient stores, bodegas and other corner merchants providing goods and
services to the underbanked community. The merchant or clerk is able to use the portal – similar to a website – with
image driven navigation to add wireless minutes for any carrier, pay bills and also load debit cards etc. What makes SurgePays
unique is that it also offers the merchant access to order wholesale goods through the portal with one touch ease. SurgePays is
essentially an e-commerce store front that allows manufactures and distribution companies to have access to merchants while cutting
out the middle man. The goal of the SurgePays Portal is to provide every Fintech and Telecom product available to convenient stores,
corner markets, bodegas, and supermarkets while procuring other consumable products commonly sold in these same stores. From the
Telecom and Fintech products such as SurgePhone Androids, SurgePhone Wireless Service, Wireless Top-ups, Bill Payments, Pinless
LD, Money Remittance, Money Orders and Reloadable Visa debit load cards to distributing partner company’s consumables such
as energy drinks, CBD oils, dry foods, frozen foods, snacks, automotive parts and many more goods you will find next time you
are in a convenient store and look around.
Surge
Digital Assets
Surge
Cryptocurrency
strategically mines Ethereum, Litecoin and cryptocurrencies. The Company’s mining operation consists
of 136 machines pooled together with other machines in a mining pool to maximize the processing power and yields. This operation
does not require any Surge human capital and runs 24/7. The goal for this subsidiary is to hold Bitcoin, Litecoin, Ripple and
Stellar as digital assets with the expectation of future appreciation. In December 2018, the Company entered into an asset purchase
agreement by which the Company transferred the assets and liabilities to a third party. See Note 6.
The
Surge Utility Token
is part of our rewards program intended to incentivize customer loyalty while also encouraging each customer
to purchase additional Surge services. For example, a wireless customer should also become a SurgePays Visa holder and or other
products in the Surge ecosystem as we expand. The Surge Tokens are issued on the Ethereum blockchain and are ERC-20 compliant.
The tokens will be used for redeeming gifts and prizes from the Surge Rewards website. The launch target for the Surge Utility
Token is Q4 2018.
TokenSpinner
is the first smartphone app that Surge Holdings Inc. has developed with a launch date target of Q4 2018. The app provides
a simple game of chance spin of the wheel to win a prize. The app has multiple Ad Network feeds that pay Surge per impression.
Players of the game have an opportunity to earn additional spins by participating in other activities (where Surge is compensated)
like watching videos or filling out surveys. The prizes will vary from gift cards, to electronics and of course Surge Tokens.
Surge
Digital Media
Surge
Logics
is a full-service digital advertising agency, specializing in lead generation, Pay Per Call, landing page optimization
and managed ad spending. Our primary media buying platforms are Google AdWords, Facebook, Instagram and Bing. We have a call center
that can handle Live Call Transfers, Customer Service Support, Lead Verification and Attorney Case Support.
Lead
generation
describes the marketing process of stimulating and capturing interest in a product or service for the purpose of
developing sales pipeline.
Pay-per-call
(PPCall, also called cost-per-call) is an advertising model in which the rate paid by the advertiser is determined by the
number of telephone calls made by viewers of an ad. Pay Per Call providers charge per call, per impression or per conversion.
Media
buying
is the process of buying media placements for advertising (on TV, in publications, on the radio, digital signage, apps
or on websites).
A
call center
or call center is a centralized office used for receiving or transmitting a large volume of requests by telephone.
Centercom
Global, S.A. de C.V.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V. (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services for SURG. Centercom also provides call center support for various third-party clients.
The Company’s primary initiatives for Centercom are:
|
●
|
Assisting
in on-boarding SurgePays Portal into over 40,000 retail locations and subsequent ongoing white glove support
|
|
●
|
Aggressively
marketing new “Free Wireless Service” program to substantially grow customer base while enhancing customer service
|
|
●
|
Launch
SurgePays Reloadable Visa Card by end of 1
st
Quarter
|
|
●
|
Support
the Company’s IT infrastructure including database management
|
|
●
|
Upsell-related
FinTech products to our existing customer base to increase revenue
|
Due to the fact that
a director, officer, and minority owner of the Company has a controlling interest in CenterCom Global, the Company recorded
its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value
upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying
condensed consolidated balance sheets. The Company recorded its equity interest in Centercom’s results of operations as
“Gain on investment in Centercom” in other income (expense) on the accompanying condensed consolidated statements
of income. The Company periodically reviews its investment in Centercom for impairment. Management has determined that no impairment
was required as of March 31, 2019.
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do
not contain all information and footnotes required by accounting principles generally accepted in the United States of America
for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated
financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial
position of the Company as of March 31, 2019 and the results of operations and cash flows for the periods presented. The results
of operations for the three months ended March 31, 2019 are not necessarily indicative of the operating results for the full fiscal
year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the
financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2018 filed with the SEC on April 1, 2019.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions
in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the
volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it
difficult to project the Company’s operating results on a consistent basis.
Concentration
of Credit Risk
Financial
instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to
the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject
the Company to concentrations of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been
recorded in the consolidated financial statements. Recent credit losses have been within management’s expectations. No customer
accounted for more than 10% of revenues in 2019 or 2018.
Method
of Accounting
Investments
held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are
accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in
Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends
to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at March 31, 2019 and December 31, 2018.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “
Fair Value Measurements and Disclosures
”, which defines fair
value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of
fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
|
●
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
●
|
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
|
Revenue
recognition
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect
adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the
comparative information would not require to be restated and continue to be reported under the accounting standards in effect
for those periods.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through providing product, services and licensing revenue.
The
adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery
of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC
606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle,
the Company applies the following five steps:
1)
|
Identify
the contract with a customer
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract
has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that
are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the
customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining
to the customer.
2)
|
Identify
the performance obligations in the contract
|
Performance
obligations promised in a contract are identified based on the services that will be transferred to the customer that are both
capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources
that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the
transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple
promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct
in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance
obligation.
3)
|
Determine
the transaction price
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount
of variable consideration that should be included in the transaction price utilizing either the expected value method or the most
likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction
price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract
will not occur. None of the Company’s contracts as of March 31, 2019 contained a significant financing component.
4)
|
Allocate
the transaction price to performance obligations in the contract
|
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract
with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or
to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct
services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative
standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance
obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling
price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable
through past transactions, the Company estimates the standalone selling price taking into account available information such as
market conditions and internally approved pricing guidelines related to the performance obligations.
5)
|
Recognize
revenue when or as the Company satisfies a performance obligation
|
The
Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related
performance obligation is satisfied by transferring a promised service to a customer.
Income
taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740,
“Income Taxes”.
Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters
that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets
reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all
of the deferred tax assets will not be realized.
Through
December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the
owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to
its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Surge and became subject to income
tax.
Through
April 1, 2018, TW operated as a limited liability company and all income and losses were passed through to the owners. In order
to facilitate the merger discussed above, TW converted from a limited liability company to a Subchapter C Corporation.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2016.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year’s presentation.
Recent
accounting pronouncements
We
have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”)
through the date these financial statements were available to be issued and find no recent accounting pronouncements that would
have a material impact on the financial statements of the Company.
The
Company had a loss from operations of approximately $1.1 million for the three months ended March 31, 2019. As of March 31, 2019,
we had cash and working capital deficit of approximately $1.4 million and $1.5 million, respectively. Management made a decision
to achieve certain goals in order to ramp up revenue in 2019 and beyond that negatively affected revenue in 2018. By implementing
this process, six key achievements were successfully reached in 2018. One, we have developed and rolled out our SurgePhone wireless
and SurgePays Debit card. Two, we have completed work on our second generation SurgePays Fintech software, which has now been
released. Three, we have organized our human resources to support the significant growth which is a major goal for fiscal year
2019. Four, we have put in place important cost controls, including our relations with our Operations Center to support our growth
in a cost-effective manner. Five, we have had ongoing productive negotiations with trade organizations to support the rapid scaling
and roll-out of our products and services. Six, we have significantly restructured our balance sheet to be an effective platform
for growth.
These
factors, among others, were addressed by management in determining whether the Company could continue as a going concern. The
Company projects that it should be cash flow positive by the end of fiscal year 2019 from ongoing operations by the combination
of increased cash flow from its current subsidiaries, as well as restructuring our current debt burden. The Company has executed
an agreement with a FINRA licensed broker, as well as several institutional investors, to bring in equity investments to pay down
existing debt obligations, cover short term shortfalls, and complete proposed acquisitions. While the Company believes in the
viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds
if necessary, there can be no assurances to that effect. While management believes it is more likely than not the Company has
the ability to continue as a going concern, this is dependent upon the ability to further implement the business plan, generate
sufficient revenues and to control operating expenses.
Additionally,
if necessary, management believes that both related parties (management and members of the Board of Directors of the Company)
and potential external sources of debt and/or equity financing will be obtained based on management’s history of being able
to raise capital from both internal and external sources coupled with current favorable market conditions. Therefore, the accompanying
consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As
discussed in Note 1, the Company closed the merger transaction (the “Merger”) that was the subject of that certain
Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless, Inc., an Oklahoma corporation (“TW”)
dated as of April 11, 2018. At closing, in accordance with the Merger Agreement, TW merged with and into TW Acquisition Corporation,
a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary of Surge Holdings, Inc. (the “Merger”),
with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary of the Company.
Pursuant
to the terms of the Merger Agreement, TW, Inc. merged into Acquisition Sub in a transaction where TW, Inc. was the surviving company
and become a wholly-owned subsidiary of the Company. The transaction was structured as a tax-free reverse triangular merger. In
addition to the 12,000,000 shares of Company Common Stock and $500,000 cash which has been previously paid to the shareholders
of TW, at the closing of the merger transaction, the shareholders of TW received the following as additional merger consideration:
●
152,555,416 shares of newly-issued Company Common Stock, which will gave the shareholders of TW, on a proforma basis, a
69.5% interest in the Company’s total Common Shares.
●
An additional number of shares of Company Common Stock, if any, which were necessary to vest 69.5% of the aggregate issued
and outstanding Common Stock in the shareholders of TW at the Closing.
●
A Promissory Note in the original face amount of $3,000,000, bearing interest at 3% per annum maturing on December 31, 2018.
●
3,000,000 shares of newly-issued Company Series A Preferred Stock
Following
the closing of the merger transaction the Company’s investment in TW consisted of the following:
|
|
Shares
|
|
|
Amount
|
|
Consideration paid prior to Closing:
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
|
|
|
$
|
500,000
|
|
Common stock issued
|
|
|
12,000,000
|
|
|
|
1,200,000
|
|
Total consideration paid
|
|
|
12,000,000
|
|
|
$
|
1,700,000
|
|
Consideration paid at Closing:
|
|
|
|
|
|
|
|
|
Common stock to be issued at closing
(1)
|
|
|
152,555,416
|
|
|
$
|
60,683,006
|
|
Series A Preferred Stock to be issued at closing
|
|
|
3,000,000
|
|
|
|
120,000
|
|
Note payable due December 31, 2018
|
|
|
|
|
|
|
3,000,000
|
|
Total consideration to be paid
|
|
|
|
|
|
$
|
63,803,006
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
|
|
|
$
|
65,503,006
|
|
|
(1)
|
The
Common Shares issued at closing of the Merger Transaction had a closing price of approximately $0.40 per share on
the date of the transaction.
|
Following
the closing of the transaction, TW’s financial statements as of the Closing were consolidated with the Consolidated
Financial Statements of the Company.
The
following presents the unaudited pro-forma combined results of operations of the Company with the TW Business as if the entities
were combined on January 1, 2018.
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
Revenues, net
|
|
$
|
3,870,775
|
|
Net income
|
|
$
|
136,005
|
|
Net income per share
|
|
$
|
0.00
|
)
|
Weighted average number of shares outstanding
|
|
|
79,963,016
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1,
2018 or to project potential operating results as of any future date or for any future periods.
The
Company consolidated TW as of the closing date of the agreement, and the results of operations of the Company include that of
TW.
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Computer Equipment
|
|
$
|
11,263
|
|
|
$
|
11,263
|
|
Furniture and Fixtures
|
|
|
7,996
|
|
|
|
7,996
|
|
Leasehold Improvements
|
|
|
25,513
|
|
|
|
25,513
|
|
|
|
|
44,771
|
|
|
|
44,771
|
|
Less: Accumulated Depreciation
|
|
|
(15,157
|
)
|
|
|
(13,782
|
)
|
|
|
$
|
29,614
|
|
|
$
|
30,990
|
|
Depreciation
expense was $1,375 and $1,227 for the three months ended March 31, 2019 and 2018, respectively.
6
|
CRYPTOCURRENCY
ASSET SALE
|
In
December 2018, the Company executed an agreement with a related party for the sale of Cryptocurrency assets for proceeds of $891,192.
In exchange for the purchased assets with a net book value of $523,743, the related party would assume the liabilities of the
entity consisting of accounts payable of $40,235 and outstanding debt and accrued interest of $808,600. The Company recognized
a gain on sale totaling $273,453.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the three
months ended March 31, 2019, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain trade
obligations totaling $55,185. At March 31, 2019 and December 31, 2018, the Company’s total credit card liability was $462,080
and $394,840, respectively.
8
|
NOTES
PAYABLE – RELATED PARTY
|
In
December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC, an entity that is owned by the
Company’s chief executive officer. The promissory note was for a principal sum up to $1.0 million at an annual interest
rate of 6%, due on December 27, 2021. As of March 31, 2019, the Company drew advances on the note totaling $1,434,000. As part
of the Cryptocurrency transaction discussed in Note 6 above, $80,000 of the outstanding balance under the promissory note was
assumed by the purchaser. During the three months ended March 31, 2019, the Company made principal and accrued interest payments
of $300,000 and $10,286, respectively. The outstanding principal balance under the promissory note due to SMDMM was $1,054,000
and $680,000 at March 31, 2019 and December 31, 2018, respectively. Accrued interest owed to SMDMM was $15,670 and $10,718 at
March 31, 2019 and December 31, 2018, respectively.
9
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of March 31, 2019 and December 31, 2018, notes payable and long-term debt consists of:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and 2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion
|
|
$
|
50,000
|
|
|
$
|
70,000
|
|
Notes payable to seller of DigitizeIQ, LLC due as noted below
1
|
|
|
485,000
|
|
|
|
485,000
|
|
Convertible note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into common stock
2
|
|
|
27,500
|
|
|
|
27,500
|
|
|
|
$
|
562,500
|
|
|
$
|
582,500
|
|
|
1
|
Notes
due seller of DigitizeIQ, LLC
includes a series of notes as follows:
|
|
●
|
A
second non-interest-bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on January
12, 2016; (Balance at March 31, 2019 and December 31, 2018 - $235,000).
|
|
|
|
|
●
|
A
third non-interest-bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on March 12,
2016 and remains unpaid as of March 31, 2019.
|
The
Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).
The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was
amortized to interest expense until the due date of the notes.
2
Convertible note payable to River North Equity, LLC (“RNE”) -
The Company evaluated the embedded conversion
for derivative treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully
amortized.
The
Company has entered into a number of agreements with RNE wherein RNE has agreed to invest up to $3,000,000 in the common stock
of the Company. These agreements require an effective Registration Statement to be on file by the Company and would allow the
Company to require RNE to purchase the Company’s common stock at 90% of the lowest trading price of the Company’s
common stock during the previous five trading days. The Company has not yet filed a Registration Statement with the SEC.
Derivative
liability
The
Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion
amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded
immediately to interest expense at inception. As noted above, the Company reached an agreement with a debt holder to convert outstanding
debt and interest into shares of common stock. As a result, the Company wrote-off the existing derivative liability of $34,556.
On
January 25, 2018 the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest at 5% per annum and
is secured by essentially all of the Company’s assets. The note is personally guaranteed by the owner of the majority
of the Company’s voting shares. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000
at an interest rate of 6% per annum. During the three months ended March 31, 2019, total advances and repayments under the LOC
were $1,130,973 and $200,000, respectively. As of March 31, 2019 and December 31, 2018, the outstanding balance on the LOC was
$930,973 and $0, respectively.
Preferred
Stock
Series
“A” Preferred Stock
As
of March 31, 2019 and December 31, 2018, there were 13,000,000 shares of Series A issued and outstanding.
Series
“C” Convertible Preferred Stock
As discussed above in
Note 1, on January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom.
Upon execution of the agreement, the Company issued 72,000 shares of Preferred C stock (convertible into 18,000,000 shares of
common stock) to a director, officer and minority owner of the Company who has a controlling interest in Centercom. The Company
recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value
upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying
condensed consolidated balance sheets.
On
February 15, 2019, Carter Matzinger elected to exchange outstanding non-interest-bearing debt totaling $389,502 owed by the Company
into 6,232 shares of Preferred C stock.
As
of March 31, 2019 and December 31, 2018, there were 721,598 and 643,366 shares of Series C issued and outstanding, respectively.
Common
Stock
On
February 14, 2019, the Company granted a consultant 21,000 restricted shares for services rendered.
On
March 27, 2019, the Company reached a settlement with a consultant to issue 875,000 shares for services rendered. Upon execution
of the settlement, the Company recorded a loss on settlement of $507,500.
During
the three months ended March 31, 2019, the Company sold an aggregate of 1,671,428 shares of common stock and 621,430 warrants,
with each warrant exercisable for one share of Common Stock at an exercise price of $0.75, resulting in gross proceeds to the
Company of $565,000.
During
the three months ended March 31, 2019, the Company recorded total stock-based compensation expense of $65,700 in relation to shares
issued for services.
As
of March 31, 2019 and December 31, 2018, there were 90,613,819 and 88,046,391 shares of Common Stock issued and outstanding, respectively.
Stock
Warrants
On February 15, 2019,
the Company executed a consulting agreement with a third party for professional services. Upon execution of the agreement, the
Company agreed to issue 100,000 warrants to purchase the Company’s common stock with an exercise price of $3.00 per share,
a term of 3 years, and immediate vesting. In addition, the consultant is eligible to receive 150,000 warrants upon achievement
of certain milestones as discussed in the agreement.
The 250,000 warrants
to be issued upon execution have an aggregated fair value of approximately $30,782 that was calculated using the Black-Scholes
option-pricing model based on the assumptions below.
|
|
March 31, 2019
|
|
Risk-free interest rate
|
|
|
2.50
|
%
|
Expected life of grants
|
|
|
3 years
|
|
Expected volatility of underlying stock
|
|
|
168.71
|
%
|
Dividends
|
|
|
0
|
%
|
The
estimated warrant life was determined based on the “simplified method,” giving consideration to the overall vesting
period and the contractual terms of the award.
During
the three months ended March 31, 2019, the Company recorded total stock-based compensation expense related to the warrants of
approximately $33,673. The unrecognized compensation expense at March 31, 2019 was approximately $0.
12
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s former chief executive officer has advanced the Company various amounts on a non-interest-bearing basis, which
is being used for working capital. The advance has no fixed maturity. As noted, Mr. Matzinger elected to exchange outstanding
non-interest-bearing debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock. As of March 31, 2019 and
December 31, 2018, the outstanding balance due was $0 and $389,502, respectively.
For
the three months ended March 31, 2019 and 2018, outsourced management services fees of $255,000 was paid to Axia Management, LLC
(“Axia”) as compensation for services provided. These costs are included in Selling, general and administrative expenses
in the Condensed Consolidated Statements of Operations. Axia is owned by the majority owner of the Company.
At
March 31, 2019 and December 31, 2018, the Company had trade payables to Axia of $137,603 and $66,535, respectively.
For
the three months ended March 31, 2019 and 2018, the Company purchased telecom services and access to wireless networks from 321
Communications in the amount of $146,690 and $366,588, respectively. These costs are included in Cost of revenue in the Condensed
Consolidated Statements of Operations. The owner of the majority of the Company’s voting shares is a minority owner
of 321 Communications.
At
March 31, 2019 and December 31, 2018, the Company had trade payables to 321 Communications of $44,421 and $52,161, respectively.
The
Company contracted with
CenterCom Global, S.A. de C.V.
(“CenterCom Global”)
to provide customer service call center services, manage the sales process to include handling incoming orders, the collection
and verification of all documents to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form,
yearly audit of all subscribers that have been active over one year to file the USAC 555 form (Recertification), information technology
professionals to maintain company websites, sales portals and server maintenance. Billings for these services in the three months
ended March 31, 2019 and 2018 were $581,073 and $450,000, respectively, and are included in Cost of revenue in the Condensed Consolidated
Statements of Operations. A director, officer, and minority owner of the Company has a controlling interest in CenterCom Global.
As discussed in Note 1, on January 17, 2019 the Company announced the completion of an agreement to acquire a 40% equity ownership
of Centercom for $178,508, the Company’s ownership percentage of the net book value of Centercom upon completion of the
transaction.
At
March 31, 2019 and December 31, 2018, the Company had trade payables to CenterCom Global of $185,709 and $175,000, respectively.
See
Note 5 for long-term debt due to related parties.
13
|
COMMITMENTS
AND CONTINGENCIES
|
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture
to the Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and
May 2013 and proposed a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms
that have found no compliance deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything
should result from this notice, the amount would not materially affect the financial position of the Company.
In
October 2018, the Company signed an agreement with Pastime Foods (“Pastime”) in order to expand the Company’s
distribution network for its SurgePays portal. The agreement will initiate distribution and sales to over 15,000 convenience and
retail locations with a long-term target of greater than 40,000 locations. According to the agreement, Pastime commits to selling
more than an average required minimum of $1,500 of monthly sales revenue per location. The Company will fund the initial placement
costs and expenses with a total initial advance of $190,000 as well as fees of $10,000. Any advances will be offset by the sharing
of distribution revenues for shipments paid by retailers directly to Pastime and the Company. The sharing percentage will be 100%
of the net distribution profit until the advances have been covered. As of December 31, 2018, the outstanding receivable due to
the Company pursuant to the agreement is $190,000 and is shown as Note Receivable on the consolidated balance sheet.
In
November 2018, the Company entered into a settlement agreement with West Publishing Corporation (“West”) to remedy
an outstanding civil action filed by West. Pursuant to the agreement, the Company will pay West the principal amount of $125,000
plus interest accruing at the annual rate of 7%.
As
of March 31, 2019, all payments were made as required in the settlement agreement.
Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The
Company evaluated performance of its operating segments based on revenue and operating profit (loss). Segment information for
the three months ended March 31, 2019 and 2018 and as of March 31, 2019 and December 31, 2018, are as follows:
|
|
Surge
|
|
|
TW
|
|
|
Total
|
|
Three Months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,141,751
|
|
|
$
|
2,797,022
|
|
|
$
|
3,938,773
|
|
Cost of revenue
|
|
|
(739,408
|
)
|
|
|
(1,740,159
|
)
|
|
|
(2,479,567
|
)
|
Gross margin
|
|
|
402,343
|
|
|
|
1,056,863
|
|
|
|
1,459,206
|
|
Costs and expenses
|
|
|
(1,547,194
|
)
|
|
|
(1,024,124
|
)
|
|
|
(2,571,318
|
)
|
Operating income (loss)
|
|
|
(1,144,851
|
)
|
|
|
32,739
|
|
|
|
(1,112,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
3,430,898
|
|
|
$
|
3,430,898
|
|
Cost of revenue
|
|
|
-
|
|
|
|
(1,751,067
|
)
|
|
|
(1,751,067
|
)
|
Gross margin
|
|
|
-
|
|
|
|
1,679,831
|
|
|
|
1,679,831
|
|
Costs and expenses
|
|
|
-
|
|
|
|
(1,271,311
|
)
|
|
|
(1,271,311
|
)
|
Operating income
|
|
|
-
|
|
|
|
408,520
|
|
|
|
408,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,043,233
|
|
|
$
|
3,722,264
|
|
|
$
|
4,765,497
|
|
Total liabilities
|
|
|
2,714,289
|
|
|
|
3,943,153
|
|
|
|
6,657,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
947,550
|
|
|
$
|
3,136,768
|
|
|
$
|
4,084,318
|
|
Total liabilities
|
|
|
2,694,258
|
|
|
|
3,378,293
|
|
|
|
6,072,551
|
|
Subsequent
to March 31, 2019, the Company sold 5,264,285 shares of common stock at an offering price of $0.35 per share resulting in gross
proceeds of $1.8 million.